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March 18, 2011

Protecting Wealthy Clients From Acts of God and Man: Slideshow

The options advisors have with insurance coverage and other planning strategies to protect clients’ lives, homes and fortunes when disasters occur

The special risks that wealthy families and individuals face are different from those faced by lower-net-worth clients. These high-net-worth clients often have large, sometimes multiple homes, businesses and international interests. They travel—and so do their children. They are often public faces and personalities, with outsized risks to reputations that other clients just don’t face. And social media makes any wealthy person or family a potential target of scammers or criminals.

In this slide show, we look at the options advisors have when it comes to proactively protecting clients from natural disasters, and from themselves.

Protecting Clients’ Home(s)

“Most people start with what they know,” when it comes to risks, says James Kane, president, HUB International Personal Insurance. They go from the ‘fender-bender, baseball through the window” to the less typical risks, and may not get to the more catastrophic risks until much later.

Too many insurance brokers or agents look at the “risk management strategy in terms of product placement, when they need to look at the risk management first, not product placement,” Kane (right) explains. Rather, they need to help clients to “look at the risks that you think put you out of business.”

For instance, lots of high-net-worth clients have multiple homes, Kane points out. Maybe, he says, they should “self insure” the “hunting lodge in Virginia that would cost $300,000 to rebuild. The premium that they’d have spent on the lodge may be better applied to the “$10 million estate [home]; think about insuring that,” and using a higher, “$200,000 deductible” to keep premium costs in check, Kane explains.

Protecting your wealthy clients from acts of God, acts of employees, and disasters of their own making.

Protecting Clients Against Home Invasions

High-net-worth families are concerned with their “lack of preparedness” and want to have a “crisis mitigation plan for the family.” The “earthquake, tsunami, the FBI investigating hedge funds—it’s the perfect storm of risk permeating the high-net-worth community,” says Paul Michael ViollisSr., CEO of Risk Control Strategies, Inc., in New York.

There has been an increase in requests from wealthy families or individuals, Viollis says, to become aware of and plan for the unexpected. “I’ve never seen a groundswell like 2011—it started in the fourth quarter of 2010. Families are especially concerned with their personal safety at home. They [want to] link preparedness over multiple generations and want to protect their family brand and legacy.”

“Home invasions have increased exponentially,” Viollis (right) says. A frightening thought, to be sure. In part, the economy and disparity in this country between those with the highest of incomes and so many who are struggling may play a part. But perhaps the biggest contributing factor is the Internet—it is a vast playground for “cyber-hacking” and related social media rifts in privacy. In fact, Viollis says, privacy has been “eliminated” by the internet, and where your wealthiest clients may always have been targets for theft, extortion or ransom, the internet makes it easier than ever for smart criminals to target and get to those clients.

Viollis cites single-and multifamily offices as being “clearly not prepared” for this type of cyber threat: a family sets up an office to manage their $700 million, the CEO and CFO do a great job managing the financial aspects for the family, but their expertise doesn’t extend to the server holding the family’s most sensitive information—portfolios, and all other aspects of financial, and very personal data. They hire that out to IT people, “who are great for baseline solutions—but not if you’re a real target,” Viollis cautions. This is a vulnerable area. Now they now what your clients have, their account numbers, potentially other information.

Protecting your wealthy clients from acts of God, acts of employees, and disasters of their own making.

Protecting Clients From Earthquakes

It is more useful to “take the most severe chance of loss, plug those holes, and work back to the common risks,” says James Kane, president, HUB International Personal Insurance. The better question to ask, Kane argues, “Is it critical to insure against earthquake and tsunami or am I better off insuring against fire and other, more frequent risks?”

Here is the insurance paradox in a nutshell. Take earthquake risk: the risk itself is “fairly predictable” but where there is a “significant fault you can't get it, or it is unaffordable.” Kane uses the “New Madrid Fault near St Louis” as an example. It has been dormant for a long time and they don’t have “building codes like they do on the West coast” where earthquakes are more frequent, so there are, near the New Madrid Fault, “a lot of older stone houses,” that may not be up to a trembler. In this case, “many wealthy homeowners will self-insure.”

Protecting your wealthy clients from acts of God, acts of employees, and disasters of their own making.

Protecting Clients From Tsunamis and Floods

Flood insurance covers tsunami risk or “inundation from outside,” says Kane rather than, for example, drains backing up. And if a home collapses from flooding of any kind, “collapse would be covered,” he says. But what if the land is now underwater? “Some carriers will not pay until you rebuild;” Kane notes, while others will pay “cash for the value of the house.”

But the reality is, he says, that in the catastrophic, high-profile disasters—Hurricanes “Andrew, Katrina” the big carriers are “not going to apply the rules” and will be more likely to pay. With urging by the presidential administration during some recent disasters, the companies “paid a lot of claims they would not typically pay.”

Basic flood insurance is a federal insurance policy with limits of $250,000 on a building and $100,000 on its contents, Kane explains. It can be relatively inexpensive if clients are not in the worst flood zones, and some mortgage companies require the coverage if clients are in particular flood zones.

Wealthy homeowners could buy excess flood insurance form Lloyds of London, Some clients of insurers to the wealthy such as “Chartis, Chubb, Fireman’s Fund or ACE,” may be able to get special coverage up to their fire limits for “water damage that emanates from outside,” Kane says. That would be a “value add for significant accounts,” and those companies would also want to insure the art, jewelry etc. It can be advantageous for wealthy clients to have the coverage from one firm on all of those different assets.

Protecting your wealthy clients from acts of God, acts of employees, and disasters of their own making.

Protecting Clients From Nuclear Exposure

There are three exclusions for nearly every policy, says Kane of HUB International: “wear and tear, workers’ compensation and nuclear. These are always excluded.” It’s possible that someone could get coverage on the Lloyd’s of London market, he notes, but “it’s so rare that [insurers] don’t know the pattern of it and can't calculate a rate.” If clients were able to purchase such coverage, and there were no losses for a few years, Kane predicts they would drop the coverage.

Protecting your wealthy clients from acts of God, acts of employees, and disasters of their own making.

Protecting Clients From Their Hedge Fund and Other Money Managers

There are some newer forms of concern that the high-net-worth is feeling [post Madoff, Lehman, AIG—now they are worried about “who is investing my money,” as hedge funds are being probed by regulators and the FBI, says Viollis of Risk Control Strategies. Clients want to know whom to trust, and there are more requests to do character investigations of hedge fund managers, money managers and advisors.

On the flip side, after reports that hedge fund offices have been “bugged” some individuals that are running hedge funds or managing assets have concerns and are asking Viollis about “technological surveillance counter-measures—TSCM—looking for hidden bugs.” It’s very easy to plant a bug, says Viollis—“eavesdropping devices” are available “on eBay for $25,” he notes. If you offer the office’s cleaning lady, “who makes $9 an hour, $5,000 to place this device under a conference table, do you think they are going to refuse?”

Protecting your wealthy clients from acts of God, acts of employees, and disasters of their own making.

Protecting Clients From Social Media Mistakes

Among the risks that wealthy families or individuals should consider include “kidnapping, ransom and extortion, identity theft, and coverage related to social media,” says Kane. Social media leaves wealthy clients more exposed to some of these threats because so much information about people and families is out on the web.

Social media and the internet are the biggest new threats to the HNW and their families, though many just don’t understand the exposure, Kane asserts. “The speed at which it is moving makes it one of the top threats.” For instance, individuals can’t “donate anonymously” to a political party, “their name—and address—are right there,” as as a matter of public record through the Federal Election Commission website.

“Have you read the Google Mail agreement?” Kane asks. “It says you’ve agreed to Google scanning your e-mails before you receive them, studying the verbiage—storing data for ads.” Kane equates allowing your kids to surf the internet unsupervised to “dropping a 9-year-old off at the mall, alone.” He suggests three things parents should do to limit kids’ internet exposure, and they have nothing to do with insurance: “keep the computer where you can see it; limit their time; and track where they have been.”

You “cannot avoid it,” says Kane, even if you are not on Facebook, LinkedIn or Twitter. One client of his was stunned to find that her name and picture were on Facebook—but she hadn’t put them there. It was “her sister’s Facebook page,” he says. The lesson is that you don’t need to be a social media or active participant on the web for your name, details about your life and family and reputation to be out there.

Kane advises clients that “they need to determine what’s being said,” about the family, themselves and their children, and their companies or family businesses, on the web, starting with a “Google or Pipl.com search.

Protecting your wealthy clients from acts of God, acts of employees, and disasters of their own making.

Protecting Clients From ‘Express’ Kidnapping

A big problem, frequently in Mexico, is the “express kidnap,” says Viollis. “A business professional sticks out like a sore thumb, leaves their hotel. A car pulls up, throws them in back, puts a hood over their head, assaults them, scares them. Calls the husband or wife or boss demanding ‘$15,000; wire it now,’” he explains. Or “’Empty the ATM now’—this is a great business—for the kidnappers,” he says because these ransoms are paid, quickly. Awareness of this threat—what to watch out for, and prevent it, is, of course, the first priority. If the worst does happen, there are things clients can learn to optimize the outcome.

In the “express kidnapping,” as opposed to an actual kidnapping for ransom, these criminals are in it to make (relatively) “small amounts of money” and the victims “always get let go.” They “target four-star and five-star hotels,” looking for prosperous looking people who are “walking to meetings, or standing outside looking for cabs and rides,” explains Viollis. Or they are looking for “young adults—on Spring break.” He questions why parents would let their college students—especially daughters—go to places like “Cabo, Mexico—one of the most destitute places in the world.”

Prevention for Kidnapping

“Self-awareness training—teaching people how to be aware,” and “survive” if they do get kidnapped

“Select transportation”—it’s not like hailing a cab in New York! “No gypsy cabs,” and even the taxis in places like Mexico may not be regulated, Viollis asserts. “Once they get you in a ‘cab’ you’re theirs.”

Understand “stalking—be aware when you see the same faces two or three times in a short period.”